Protected Business Leases: Tenant Rights and Obligations

A ‘Protected Lease’ is a lease that has the benefit of security of tenure under the Landlord and Tenant Act 1954 (the 1954 Act). Only a lease which has security entitles the tenant to remain in its business premises when its lease expires and ‘hold over’ and, except in certain circumstances, obliges the landlord to grant the tenant a new lease on updated, but generally no more onerous terms than the old lease. This note applies only to Protected Leases.

The terms which the Landlord is entitled to update are the amount of rent payable (which may be changed to the current market rent) and any terms where there have been changes in the law or general market practice affecting commercial lease since the original lease was granted. An example of this would be the changes to rights to assign brought about by the Landlord and Tenant (Covenants) Act 1995.

If a tenant has the protection of the 1954 Act, its lease will not automatically come to an end at the expiry of the lease term unless the Tenant chooses to leave the premises on or before the final day of the term.  If the tenant does leave by lease expiry, it will not have the right to go back into the premises after lease expiry.

The 1954 Act includes provisions whereby either:

(a) the Tenant can request the grant of a new lease from its Landlord or

(b) the Landlord may notify the Tenant that: –

1. It wishes to end the lease and not grant the Tenant a new lease as it is able to prove one of the statutory grounds entitling it not to grant a new lease (for example that the Landlord wishes to redevelop the property or wishes to occupy the premises for its own use); or
2. It is prepared to grant a new lease and in such a case the landlord’s notice will set out the proposed new rent and the new terms of the lease

The 1954 Act contains provisions for the Court to determine the terms of the new lease if the landlord and the tenant are unable to reach agreement.

A tenant, if it wishes to remain, is likely to serve a notice on the Landlord requesting the grant of a new lease if it believes that the market rent has gone down and the rent that it is currently paying under the expired rent is higher than the current open market rent or if it wants the security of knowing that it has the new lease in place and there is no risk of the landlord bringing the lease to an end on the ground , for example, that it wants to redevelop the site.

If neither party has been decided to serve the necessary statutory notice to start off the procedures for the grant of a new lease, the tenant who stays in occupation at the expiry of the old lease is entitled to remain in occupation and ‘hold over’ on the same terms and conditions as are contained in the old lease.  This means that the same amount of rent as that due at the expiry of the lease will continue to be payable on the same payment dates, the same service charge (if any) and insurance provisions will apply and all existing Tenant’s covenants and conditions will also continue to bind the Tenant.  Similarly, the Landlord will continue to be bound by the Landlord’s obligations to for example insure the building and provide services.

We were recently asked by a client whether it was possible to assign their lease which was being “held over” under the 1954 Act. The tenant believed the lease was worth a premium as the rent being paid was less than the current market rent. The lease had expired in 2015 and neither the Tenant nor the Landlord had taken any action to renew the lease.  The answer to the question is that the assignment provisions contained in the lease continue to apply so that the held over lease may be assigned to a third party but generally Landlord’s consent will be required and various obligations such as the provision of an Authorised Guarantee Agreement will continue to apply.  However, a tenant is likely to find it very difficult to assign a held over lease, especially for a premium, as a third party is not likely to be willing to take on a lease where it is uncertain whether the Landlord is intending to serve a notice on the Tenant saying that he is intending to redevelop the building or maybe wishes to use it for his own business.

It is likely that any third party interested in the premises will not be prepared to complete the assignment until the new lease has been put in place- and he will expect the current tenant to organise this

Can a Tenant end a business lease which has been held over?

As mentioned, if a Tenant holds over under its current business lease, the Landlord is not entitled to ask the Tenant to leave unless he has served a notice to quit of not less than six months and not more than 12 months and has proved one of the grounds for ending the arrangement under the 1954 Act, but what if the lease expires and the tenant continues in occupation, paying the same rent and on the same terms and then decides that it wants to close its business or move elsewhere?

1. The easiest way for a Tenant to terminate the lease is to cease business occupation on or before the end of the original lease term. If the Tenant is not in occupation for business purposes at the end of the term the tenancy will automatically terminate and the Tenant will have no right of further occupation or a right to renew the lease. Obligations with regards to repairs and dilapidations will apply, but the tenant will not be obliged to pay any further rent or other outgoings such as business rates after the original lease term has ended.
2. If, however the Tenant remains in occupation after the end of the original lease term, even by one day, the Tenant is entitled to bring the lease to an end but only by giving at least three months’ notice to the Landlord. All rents and monies due under the lease will continue to be payable until the three months expires and all lease obligations, for example those relating to repairs will apply until the expiry of the tenant’s notice

Finally, just a brief mention of SDLT. The position on SDLT where a lease is held over is complex but SDLT may be payable for the period of holding over. Please contact us for further information on the payment of SDLT if you are in occupation under a lease that has been held over and we will be able to advise as to whether SDLT will be payable.